Treasury Dept. Proposes AML Rule for Advisors

Advisors could soon be saddled with a new set of compliance requirements courtesy the Treasury Department, which is proposing a rule that would compel RIAs to establish formal anti-money laundering policies.

The Treasury Department's Financial Crimes Enforcement Network argues that the AML exemption for advisors is a loophole that criminals and terrorists could exploit to move money through the U.S. financial system.

FinCEN Director Jennifer Shasky Calvery contends that RIAs can make for an easy entry point for individuals and organizations looking to move dirty money and avoid other financial entities that have formal AML procedures in place, such as banks and broker-dealers.

"Investment advisors are on the front lines of a multi-trillion dollar sector of our financial system," Calvery says in a statement. "If a client is trying to move or stash dirty money, we need investment advisors to be vigilant in protecting the integrity of their sector."

In its proposal, FinCEN is looking to extend AML provisions under the Bank Secrecy Act to RIAs that are registered with the SEC, including those working with certain hedge funds and private equity funds.

Under those provisions, covered advisors would have to begin filing currency transaction reports logging the movement of money through their clients' accounts and submit suspicious activity reports to federal authorities. FinCEN is proposing to delegate enforcement of the AML rule for advisors to the SEC.

Advisors would be exempt from the obligation to maintain a formal customer identification program under the proposal, though FinCEN says that it expects to address that issue with separate rules jointly with the SEC.

The rule proposal met with a tepid reaction from the Investment Adviser Association, which questioned the need for AML rules in the RIA sector and warned that the challenge of complying with additional regulations could pose a significant burden for small practices.

In a statement, IAA President and CEO Karen Barr acknowledges "the importance of detecting and preventing money laundering," but challenges the merit of additional regulations, particularly when many larger advisors already have AML programs in place.

"Many advisors, particularly those affiliated with banks or broker dealers, have voluntarily implemented AML procedures," Barr says. "That said, the advisory business poses little risk in this area. We will be looking at today's proposed rules with an eye toward whether the expected benefits of the proposed regulation justify its compliance costs, particularly with regard to smaller firms."

Duane Thompson, senior policy analyst at the fiduciary training firm fi360, similarly questions the wisdom of the regulation, though he notes that it's not coming out of the blue, as the Treasury Department has been mulling an AML rule for advisors for years, even after an earlier proposal issued in 2003 was withdrawn five years later.

"I think the real rub is that, to my knowledge, no major enforcement case involving money laundering has ever been brought against an independent RIA," Thompson says.

"However, an AML rule for advisors has been waiting in the wings for years, so it's not a complete surprise. I think most advisors either forgot about it or assumed they'd keep the free pass Treasury gave them in 2003," he adds. "It's just not clear why it's needed now, and if it will be eventually applied to state-registered advisors. No doubt the rule would hit them the hardest."

A spokesman for FinCEN did not immediately respond to a request for comment on the proposed rules beyond the director's statement. The agency is accepting comments on its proposal for two months following publication in the Federal Register.

Federal regulators had put the industry on notice that an AML rule would be forthcoming, suggesting that advisors consider adopting an AML program as a best practice. Earlier this year at the IAA's regulatory and compliance conference, a senior SEC official told the audience that "some of you probably already have some type of program in place," but cautioned that "if you don't already have a program, though, it may be time to start thinking about what your program will look like."

In that speech, Kris Easter Guidroz, senior special counsel at the SEC, recommended that advisors review the parallel cases that the SEC and FinCEN brought against Oppenheimer regarding lax AML policies that was settled in January, to the tune of a $20 million fine and an admission of wrongdoing. Though that case involved a broker-dealer, Guidroz cautioned that "a lot of the red flags outlined in the SEC order and the FinCEN assessment are very relevant to advisors."

Still, FinCEN's proposed rule could pose an unwelcome compliance burden to advisors that are already struggling to meet an expanding list of obligations under the current regulatory regime, Thompson argues.

"My sense is that the AML rule is going to make planners roll their eyes and ask, 'What next?'" he says. "There will be a cost attached to the new compliance requirement. The cost is probably incremental -- the kind that on its own may not amount to much -- but, combined with all of the other books and records that advisors must maintain, adds to the compliance burden."